ABSTRACT

This study examines the accounting problems affecting microfinance banks, using selected microfinance banks in Abakaliki metropolis of Ebonyi State as its area of investigation. The research focuses on identifying the different accounting challenges encountered by these financial institutions and assessing how such problems influence their operations and performance. A survey research design was adopted for the study. Data were collected through questionnaires, oral interviews, discussions, and a review of relevant literature. The information gathered was analysed and used as the basis for drawing conclusions. The chi-square statistical technique was employed in testing the research hypotheses. The findings revealed that accounting problems have a significant effect on the performance of microfinance banks. Based on these findings, the study recommends regular training and professional development for staff, the provision of a suitable working environment for employees and customers, the recruitment of qualified and experienced personnel, and the adoption of modern banking equipment and computerised accounting systems to improve the operations of microfinance banks.

TABLE OF CONTENTS

CERTIFICATION

DEDICATION

ACKNOWLEDGEMENT

ABSTRACT

TABLE OF CONTENTS

LIST OF TABLES

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

1.2 Statement of the Problem

1.3 Objectives of the Study

1.4 Research Questions

1.5 Statement of Hypotheses

1.6 Significance of the Study

1.7 Scope and Limitations of the Study

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.1 Conceptual Framework

2.1.1 Meaning of Bank

2.1.2 Meaning of Banking

2.1.3 Meaning of Microfinance

2.1.4 Historical Evolution of Banking

2.2 Empirical Review

2.3 Theoretical Framework

2.4 Capital, Ownership and Management Structure of Microfinance Banks

2.5 Relationship Between Microfinance Banks and Commercial Banks

2.6 Available Monitoring Measures

2.7 Objectives of Microfinance Banks

2.8 Functions of Microfinance Institutions

2.9 Problems of Microfinance Banks

CHAPTER THREE: METHODOLOGY

3.1 Research Design

3.2 Area of the Study

3.3 Population of the Study

3.4 Sampling Technique and Sample Size Determination

3.4.1 Sample Size Determination

3.4.2 Sampling Techniques

3.5 Sources of Data

3.5.1 Primary Sources

3.5.2 Secondary Sources

3.6 Method of Data Generation

3.7 Reliability of the Research Instrument

3.8 Validity of the Research Instrument

3.9 Data Analysis Techniques

CHAPTER FOUR: FINDINGS

4.1 Data Presentation and Analysis

4.2 Testing of Hypotheses

CHAPTER FIVE: DISCUSSION OF FINDINGS

5.1 Discussion of Findings

5.2 Summary of Findings

CHAPTER SIX: CONCLUSION AND RECOMMENDATIONS

6.1 Conclusion

6.2 Recommendations

6.3 Suggestions for Further Studies

APPENDICES

Appendix I

Appendix II

Appendix III

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Banking has remained an important part of economic activities and social development over the years. Banks are service-based financial institutions that provide facilities for carrying out financial transactions for individuals, businesses, companies, and other organisations. As financial intermediaries, they perform important functions such as accepting deposits, granting loans, and handling negotiable financial instruments. They generate income through interest payments, service charges, and other banking activities (Ozili, 2022). A financial institution is recognised as a bank when it has the legal authorisation to accept deposits that are repayable on demand or within a short period and provide credit facilities as part of its business operations.

The major responsibilities of banking institutions centre on collecting deposits from customers and making funds available to individuals and organisations that require credit. Other banking services support these basic functions of financial intermediation (Babalola, Mhlongo, Obinyeluaku, Oladayo, & Daraojimba, 2023). The development of banking in Nigeria can be traced to the colonial period, when commercial activities carried out by colonial merchants in West Africa, together with the establishment of territorial administrations, created the need for organised financial institutions within the region.

For many years, banking services in Nigeria were concentrated mainly in urban areas, leaving a large number of people in rural communities without access to formal financial services. To address the financial needs of low-income earners in both rural and urban areas, the People's Bank of Nigeria was established in 1989. Its target beneficiaries included farmers, artisans, carpenters, and other economically disadvantaged individuals. However, its funding approach, which depended heavily on government support, affected its ability to operate sustainably. The institution also experienced problems associated with insufficient capital and high operating expenses, which frequently exceeded its earnings. These challenges contributed to the need for a more sustainable system of providing financial services and credit facilities to people at the grassroots level (Central Bank of Nigeria [CBN], 2005).

The introduction of microfinance banking in Nigeria was a response to the need to improve access to financial services among low-income individuals and small businesses. Before 2005, community banks served as the major institutions responsible for providing financial services to people at the grassroots level. However, many of these banks operated with limited institutional capacity, inadequate capital, weak management structures, and insufficient ability to meet the financial needs of the large population without access to conventional banking services (Acha, 2012, as cited in Akinyele, Oloba, & Mah, 2022).

In December 2005, the Central Bank of Nigeria introduced the Microfinance Policy, Regulatory and Supervisory Framework during the administration of President Olusegun Obasanjo. Under this policy, existing community banks were required to convert into microfinance banks within two years, with the transition expected to be completed by December 2007 (CBN, 2005). This policy represented an important step towards establishing a more organised and regulated system for providing financial services to low-income individuals and small enterprises.

The introduction of the policy was motivated by several objectives. According to the CBN (2005), the conversion of community banks into microfinance banks was intended to address the weaknesses of existing community banks, improve the capital base of institutions serving low-income groups, and encourage the economic empowerment of disadvantaged individuals. Other objectives included creating employment opportunities, reducing poverty, expanding savings facilities for rural and underserved communities, and attracting local and international investment into the microfinance sector. The policy also sought to encourage the use of available financing opportunities, including the Small and Medium Enterprises Equity Investment Scheme (SMEEIS) fund, to support microfinance activities.

Globally, the microfinance industry has continued to expand in terms of its size and economic importance. The industry is projected to reach approximately US$506 billion by 2030, representing an estimated annual growth rate of 12.3 per cent. It is also reported to involve about 10,000 institutions operating across different regions, including Asia-Pacific, Latin America and the Caribbean, Africa, and the Middle East (Agusto & Co., 2025). In Nigeria, the microfinance banking industry has experienced considerable changes since the introduction of the national microfinance policy. As of December 2024, the country reportedly had 729 microfinance banks licensed by the Central Bank of Nigeria. These institutions were classified into three categories: nine national microfinance banks with operations across the country, 121 state microfinance banks serving particular states, and 599 unit microfinance banks operating within smaller geographical areas (Agusto & Co., 2025).

Despite this expansion, microfinance banks in Nigeria continue to face several operational, financial, and regulatory difficulties. In May 2023, the Central Bank of Nigeria withdrew the operating licences of 179 microfinance banks. The reasons included failure to conduct the banking activities for which the institutions were licensed, non-compliance with licensing requirements, and violations of obligations under the Banks and Other Financial Institutions Act (BOFIA) 2020. Some of the affected institutions were also reported to have serious capital deficiencies, including capital adequacy ratios below the minimum requirements prescribed by the CBN (Central Bank of Nigeria, 2023). This development highlighted the difficulties associated with financial management, regulatory compliance, and institutional governance within the microfinance banking sector.

The growth of microfinance banks in Abakaliki metropolis, the capital of Ebonyi State, reflects the broader effort to extend financial services to communities that have limited access to conventional banking. Ebonyi State has a largely agricultural economy, and a considerable proportion of its population lives in rural communities. This creates a strong need for accessible financial services that can support farmers, traders, artisans, and small business owners. Although financial institutions operate within Abakaliki metropolis, some residents, particularly rural households, small-scale farmers, and petty traders, still experience difficulties accessing formal financial services. This makes the effective operation of microfinance banks important to the economic development of the area (Ugwuoke, Ogbonna, & Freeman, 2023).

The accounting and financial reporting environment in Nigeria has also changed over time due to the introduction of new regulatory and reporting requirements. The adoption of International Financial Reporting Standards (IFRS) in 2012, the enactment of the Companies and Allied Matters Act (CAMA) 2020, and the regulatory responsibilities of the Financial Reporting Council of Nigeria (FRCN) have influenced the financial reporting practices of institutions operating in the country (Echegu, Aleke, & Alum, 2024). However, some microfinance banks in Abakaliki and other parts of Nigeria continue to experience difficulties complying with these requirements. Such challenges may arise from inadequate accounting systems, insufficiently trained personnel, and limited access to modern banking infrastructure.

Accounting is essential to the effective operation of every financial institution because it provides the information required for recording transactions, preparing financial statements, monitoring resources, and making management decisions. When accounting procedures are weak or poorly implemented, errors may occur in financial records, reporting may become unreliable, and management may find it difficult to assess the true financial position of the institution. These problems can also affect profitability, customer confidence, and compliance with regulatory requirements.

It is against this background that this study examines the accounting problems affecting selected microfinance banks in Abakaliki metropolis of Ebonyi State. The study seeks to identify the major accounting challenges experienced by these institutions and assess how such challenges influence their operations, financial performance, and profitability. It also aims to suggest practical measures that can improve accounting practices and strengthen the overall effectiveness of microfinance banks.

1.2 STATEMENT OF THE PROBLEM

Abakaliki metropolis, as the capital of Ebonyi State, accommodates different categories of financial institutions that provide banking services to farmers, traders, industrialists, business owners, and other members of the public. However, the availability of these institutions has not completely addressed the financial needs of people in both urban and rural communities. This situation has created the need for microfinance banks to provide financial services to individuals and businesses that may not have easy access to conventional banking facilities. Despite their importance, microfinance banks continue to experience accounting and operational problems that affect their ability to perform effectively.

Studies have identified several challenges affecting microfinance banks in Nigeria, particularly those operating in states with relatively limited commercial and industrial activities, such as Ebonyi State. These challenges include poor accounting procedures, inadequate record-keeping systems, insufficient capital, shortages of qualified and experienced accounting personnel, and difficulties complying with financial reporting regulations (Babalola et al., 2023; Echegu et al., 2024). In some cases, the quality of services provided by microfinance banks has also been affected by faulty operational equipment, financial difficulties, and inadequate infrastructure. Such conditions can reduce operational efficiency and negatively affect the experiences of customers and other stakeholders.

Another major concern is the effect of accounting weaknesses on the financial position and sustainability of microfinance banks. Inadequate accounting records can make it difficult for management to monitor income, expenditure, loans, deposits, and other financial transactions accurately. Poor financial reporting may also affect management decisions, reduce the reliability of financial statements, and make it difficult for regulatory authorities to assess the actual condition of these institutions. Where accounting systems are ineffective, financial irregularities may remain undetected, thereby increasing the risk of losses and poor institutional performance.

The regulatory action taken by the Central Bank of Nigeria in 2023, when the operating licences of 179 microfinance banks were revoked, further demonstrates the seriousness of the challenges facing the sector. The reasons given for the revocation included failure to meet licensing conditions and breaches of regulatory requirements (Central Bank of Nigeria, 2023). These developments show the importance of sound accounting practices, adequate financial management, and effective corporate governance in maintaining the stability of microfinance banks.

If these problems are not properly addressed, they may continue to weaken the financial position of microfinance banks, reduce their profitability, and discourage customers from using their services. This could also limit their ability to provide credit and other financial services to low-income individuals and small businesses, thereby reducing their contribution to financial inclusion and poverty reduction (Akinyele et al., 2022; Agusto & Co., 2025).

The major problem addressed by this study, therefore, is the continued existence of accounting difficulties among microfinance banks in Abakaliki metropolis of Ebonyi State. Although these institutions were established to improve access to financial services, their ability to achieve this objective may be affected by inadequate accounting procedures, weak financial reporting systems, insufficiently trained personnel, and other institutional challenges. The study will consequently investigate the nature of these accounting problems and determine their effects on the operations, performance, profitability, and public confidence in selected microfinance banks within the study area.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the accounting problems affecting microfinance banks and assess how effective accounting and operational practices can improve their performance, particularly among selected microfinance banks in Abakaliki metropolis of Ebonyi State.

The specific objectives are to:

1. Identify the major accounting problems affecting the operations of microfinance banks in Abakaliki metropolis.

2. Examine the effects of accounting problems on the performance of microfinance banks in Abakaliki metropolis.

3. Determine how accounting problems affect the profitability of microfinance banks and the confidence customers and other stakeholders place in them.

4. Examine the effects of accounting problems on accounting ratios and the profitability performance of microfinance banks.

1.4 RESEARCH QUESTIONS

The following research questions will guide the study:

1. To what extent do accounting problems affect the operations of microfinance banks in Abakaliki metropolis?

2. How do accounting problems influence the performance of microfinance banks in Abakaliki metropolis?

3. To what extent do accounting problems affect the profitability of microfinance banks and the confidence customers and other stakeholders have in them?

4. How do accounting problems influence accounting ratios and the profitability performance of microfinance banks?

1.5 STATEMENT OF HYPOTHESES

The following hypotheses are formulated for testing in the course of this study.

Hypothesis One

H₀: Accounting problems do not hinder the operations of microfinance banks.

H₁: Accounting problems hinder the operations of microfinance banks.

Hypothesis Two

H₀: Accounting problems do not significantly affect the profitability of microfinance banks or the confidence customers and other stakeholders place in them.

H₁: Accounting problems significantly affect the profitability of microfinance banks and the confidence customers and other stakeholders place in them.

Hypothesis Three

H₀: Accounting problems do not significantly affect the performance of microfinance banks.

H₁: Accounting problems significantly affect the performance of microfinance banks.

Hypothesis Four

H₀: Accounting problems do not significantly affect the accounting ratios and profitability performance of microfinance banks.

H₁: Accounting problems significantly affect the accounting ratios and profitability performance of microfinance banks.

1.6 SIGNIFICANCE OF THE STUDY

This study is expected to contribute to the understanding and improvement of microfinance banking operations in Nigeria, particularly in Abakaliki metropolis of Ebonyi State. Microfinance banks play an important role in promoting financial inclusion, supporting small businesses, reducing poverty, and improving the economic conditions of people in both rural and urban communities (Babalola et al., 2023; Osuma, 2025). However, these objectives can only be achieved when the institutions maintain effective accounting systems and sound operational practices.

First, the study will be useful to government policymakers, microfinance bank managers, and customers. It will provide information on the accounting challenges affecting microfinance banks and highlight possible approaches to improving their financial and operational management. Considering the regulatory concerns demonstrated by the CBN's revocation of 179 microfinance bank licences in 2023, the findings may also provide useful guidance for strengthening institutional compliance and accountability (Central Bank of Nigeria, 2023).

Second, the findings and recommendations of the study may help reduce the accounting problems that affect the operations of microfinance banks in Ebonyi State. By identifying weaknesses in accounting procedures, financial records, reporting systems, and staff capacity, the study may encourage the adoption of better accounting practices and more effective financial management procedures. This is important because reliable financial reporting contributes to the sustainability and long-term performance of financial institutions (Echegu et al., 2024; Akinyele et al., 2022).

Third, the study will be beneficial to shareholders, investors, and creditors of microfinance banks. Reliable accounting information helps these stakeholders assess the financial position and performance of an institution before making investment or lending decisions. Improved accounting practices may therefore strengthen confidence in the financial information provided by microfinance banks and improve their relationships with stakeholders.

Furthermore, the study will contribute to existing academic literature on accounting and microfinance banking in Nigeria. It will provide useful information for students, researchers, and other individuals interested in investigating accounting challenges, financial reporting, and the performance of microfinance institutions. It may also serve as a reference for future studies on related subjects.

1.7 SCOPE AND LIMITATIONS OF THE STUDY

This study focuses on selected microfinance banks operating within Abakaliki metropolis of Ebonyi State, Nigeria. It examines the accounting problems experienced by these institutions and considers how such challenges affect their operations, financial performance, profitability, and accounting ratios. The study is limited to the selected institutions within the geographical area and does not cover all microfinance banks operating in Ebonyi State or Nigeria.

In carrying out the research, the researcher encountered some challenges that affected the process of data collection and the overall conduct of the study. These limitations include the following:

1. Time Constraint: The researcher had to carry out this study alongside other academic responsibilities. The time available was therefore limited, making it difficult to conduct a wider investigation covering more microfinance banks across Ebonyi State.

2. Financial Constraint: Limited financial resources affected the extent of data collection. The cost of travelling to different locations to obtain relevant information and primary data placed additional demands on the research budget, particularly under the prevailing economic conditions.

3. Limited Research Materials: The availability of literature specifically addressing microfinance banking in Abakaliki metropolis was limited. Much of the existing research on the Nigerian banking sector focuses on commercial banks and the activities of the Central Bank of Nigeria, while accounting challenges affecting microfinance institutions receive comparatively less attention. This created some difficulties in obtaining materials directly related to the study area.

4. Reluctance of Respondents: Some employees of the selected microfinance banks were unwilling to complete questionnaires or participate in oral interviews. Others were hesitant to disclose information they considered confidential or sensitive. This affected the amount of information that could be obtained from some respondents.

Despite these challenges, efforts were made to obtain relevant information from available respondents and secondary sources to address the research objectives.

DEFINITION OF TERMS

1. Banking: Banking refers to the financial activities carried out by institutions that are legally authorised to accept deposits from individuals and organisations, safeguard such funds, and provide loans and other financial services to customers for the purpose of generating income.

2. Unit Banking: Unit banking refers to a banking arrangement in which a bank operates from a single location without establishing a network of branches in other areas.

3. MFBN: MFBN refers to Microfinance Bank in Nigeria. It is a financial institution licensed by the Central Bank of Nigeria to accept deposits and provide microfinance services to low-income individuals, households, and small businesses.

4. MFI: MFI means Microfinance Institution. It refers to an organisation established to provide financial services, including loans and other forms of financial support, to low-income individuals and groups, particularly those who have limited access to conventional banking facilities.

5. Capital Base: Capital base refers to the financial resources that a microfinance bank is required to maintain as part of its regulatory and operational requirements. The applicable minimum capital requirement is determined by the regulatory framework established by the Central Bank of Nigeria.

6. Metropolis: A metropolis is a major urban centre that serves as an important administrative, commercial, social, or economic hub within a particular geographical area.

7. UMP: UMP means Urban Management Programme. It refers to an initiative aimed at improving the administration, planning, and provision of infrastructure and services in urban areas.

8. Management: Management refers to the process of planning, organising, directing, and controlling an organisation's human, financial, and material resources to achieve its established objectives. In microfinance banking, it involves coordinating the institution's activities to ensure effective service delivery and proper use of resources.

9. Correspondent Banking Relationship: A correspondent banking relationship is an arrangement through which one financial institution maintains an account or service relationship with another bank to facilitate particular banking transactions. In the context of this study, it refers to the relationship maintained by microfinance banks with commercial banks to support services such as cheque clearing and other interbank transactions.

10. CBN: CBN stands for Central Bank of Nigeria. It is Nigeria's apex monetary and financial regulatory institution, responsible for monetary policy, financial system stability, and the regulation and supervision of banks and other financial institutions operating in the country.

11. IFRS: IFRS means International Financial Reporting Standards. These are internationally recognised accounting standards issued by the International Accounting Standards Board (IASB) to guide the preparation and presentation of financial statements and improve the consistency and comparability of financial information.

12. BOFIA: BOFIA stands for Banks and Other Financial Institutions Act. It is the principal legislation that provides the legal framework for the establishment, operation, regulation, and supervision of banks and other financial institutions in Nigeria.

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